It is a very safe bet that Monday’s massive sell-off made investors a little nervous despite the rally on Tuesday. With August typically being one of the most volatile months of the year, and the slippery slope of the fall not all that far away, it makes sense to remain cautious. One solid strategy is to stay away from companies that are dependent on products from China that could be tagged with tariffs. One sector scores high in that area.
A new research report from the analysts at Baird makes the case that some of the top restaurant stocks are still strong buys despite having had an outstanding year already. They noted this in the report:
We still believe some exposure to the sector is warranted when considering that many restaurant business models contain attributes that should be considered attractive in the current market backdrop, including a relatively high mix of sales within the U.S. (i.e., generally low exposure to issues impacting economies outside the U.S.), a relatively stable top-line outlook (with restaurants seen as less discretionary than other consumer sectors), and fairly durable income streams (particularly for highly franchised systems). Also, unlike other companies within the consumer sector, most restaurants have low/minimal exposure to cross-border trade issues.
Six such stocks are rated Outperform at Baird, and here are the four that may have the best upside for investors now.
Chipotle Mexican Grill
Despite numerous issues over the past few years, the company remains a favorite destination for those looking to eat out. Chipotle Mexican Grill Inc. (NASDAQ: CMG) operates more than 2,400 fast-casual Mexican restaurants offering freshly made burritos, tacos, burrito bowls and salads. It is 100% company operated and runs average unit volumes much higher than its peers.
The company reported second-quarter adjusted earnings per share of $3.99, ahead of the $3.76 Wall Street consensus estimate. Up 10%, storewide comparisons were also above the Wall Street estimate. Chipotle called out food inflation in avocados in the report, but it is baking in some price normalization into its forward expectations.
In addition, operations improvements implemented by Chief Restaurant Officer Scott Boatwright are really starting to take hold, and restaurant-level margins can possibly continue to grow, driven by more regular pricing, traffic gains and efficiencies at the unit level.
The Baird price target for the shares is a massive $875. The Wall Street consensus price objective is set much lower at $758.70, and note that the shares ended trading on Tuesday at $790.61 apiece.
This stock was scorched recently and offers an excellent entry point. Domino’s Pizza Inc. (NYSE: DPZ) is the number one pizza delivery company in the world, with roughly 13,000 stores in 50 states and more than 70 countries. The company’s system is more than 97% franchised, and 59% of the stores are located internationally.
Domino’s has been benefiting from a steadily growing online/digital ordering mix that currently represents over 50% of domestic orders and has a long runway for growth. Since 2008, more than 80% of the menu offerings are new or significantly revised.